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The last hedge fund standing

Crude oil hedge funds continue to run for the exits and are in part responsible for yesterday’s late-day swoon. Yet, despite market turmoil, the supply versus demand fundamentals for oil continue to be very bullish. Even the International Energy Agency (IEA), that hates to say anything bullish about oil, is acknowledging that despite their prior doubts that OPEC and their Non-OPEC coconspirators have succeeded in removing the global oil glut.

The IEA was once again to raise its forecast for oil demand growth in 2018 to 1.4 million barrels per day, from a previous projection of 1.3 million barrels per day. Still, they acknowledge that oil demand grew at a rate of 1.6 million bpd in 2017, so they expect a demand drop even though global growth is stronger than it was last year.

As I have written before, the IEA seems to always have to raise their demand forecast because they generally underestimate demand. Perhaps it is because they represent the consuming nations and they do not want to say anything that may raise prices.

The IEA was widely criticized for their pronouncement that shale oil production would explode, which of course is a little too hyperbolic for a major agency to say. In this report, they toned down their rhetoric but still said that, “U.S. producers are enjoying a second wave of growth so extraordinary that in 2018 their increase in liquids production could equal global demand growth.”

Yet, because they always underestimate demand they will be wrong again. If they were right in their previous forecasts, then global inventories would be rising, not falling globally by the fastest rate in almost six years.

We think that oil is poised to move higher! The hedge funds have been mostly shaken out and the reality of falling supply and surging demand will help us find a base for the next leg higher!